In Case You Missed It: Inequality, Debt and Destitution

In this issue, there’s discussion on getting car jacked by lenders, being “present” for poverty, business ed and inequality, and what success looks like for B-corps.

Must Reads

The week we have this piece by Robert Reich in the Harvard Business Review discussing the way in which business schools including and perhaps especially Harvard, are driving inequality:

A survey, released on September 6, of 1,947 Harvard Business School alumni showed them far more hopeful about the future competitiveness of American firms than about the future of American workers. But, as the authors of the survey conclude, such a divergence is unsustainable. Without a large and growing middle class, Americans won’t have the purchasing power to keep U.S. corporations profitable, and global demand won’t fill the gap. Moreover, the widening gap eventually will lead to political and social instability. As the authors put it, “any leader with a long view understands that business has a profound stake in the prosperity of the average American.”...

[S]tarting in the late 1970s, a new vision of the corporation and the role of CEOs emerged – prodded by corporate “raiders,” hostile takeovers, junk bonds, and leveraged buyouts. Shareholders began to predominate over other stakeholders. And CEOs began to view their primary role as driving up share prices. To do this, they had to cut costs – especially payrolls, which constituted their largest expense. Corporate statesmen were replaced by something more like corporate butchers, with their nearly exclusive focus being to “cut out the fat” and “cut to the bone.”

In consequence, the compensation packages of CEOs and other top executives soared, as did share prices. But ordinary workers lost jobs and wages, and many communities were abandoned. Almost all the gains from growth went to the top... So it would seem worthwhile for the faculty and students of Harvard Business School, as well as those at every other major business school in America, to assess this transformation, and ask whether maximizing shareholder value – a convenient goal now that so many CEOs are paid with stock options – continues to be the proper goal for the modern corporation. Can an enterprise be truly successful in a society becoming ever more divided between a few highly successful people at the top and a far larger number who are not thriving?

Despite escalating costs for college, the net returns for a degree are high enough that college still offers a considerable economic opportunity to most people... Rising college costs, the greater numbers of students pursuing higher education, and the recent trends in income and wealth have led to a dramatic increase in student loan debt. Outstanding student loan debt quadrupled from $260 billion in 2004 to $1.1 trillion this year. Sorting families by wealth, the SCF shows that the relative burden of education debt has long been higher for families with lower net worth, and that this disparity has grown much wider in the past couple decades...Higher education has been and remains a potent source of economic opportunity in America, but I fear the large and growing burden of paying for it may make it harder for many young people to take advantage of the opportunity higher education offers.

Some of you may have heard that sandwich chain Jimmy Johns is asking some of its employees to sign noncompete agreements, news that cropped up during coverage of two law suits alleging wage theft. Your editor has learned that it is in fact managers at the restaurant chain in exchange for training and not rank level employees. The question remains whether being a manager would still be considered a low wage job and, as the New York Times' Neil Irwin points out, is a disturbing trend of all kinds of employees being asked to sign such agreements:

American businesses are paying out a historically low proportion of their income in the form of wages and salaries. But the Jimmy John’s employment agreement is one small piece of evidence that workers, especially those without advanced skills, are also facing various practices and procedures that leave them worse off, even apart from what their official hourly pay might be. Collectively they tilt the playing field toward the owners of businesses and away from the workers who staff them... What’s striking about some of these labor practices is the absence of reciprocity. When a top executive agrees to a noncompete clause in a contract, it is typically the product of a negotiation in which there is some symmetry: The executive isn’t allowed to quit for a competitor, but he or she is guaranteed to be paid for the length of the contract even if fired. Jimmy John’s appears to have demanded the same loyalty as the price of having a low-paid job hourly job making sandwiches, from which the worker could be fired at any time for any reason.

Meanwhile the Washington Post's Lynda DePillis looks at the challenges facing home health care aides, one of the fastest growing job sectors, who are taking up the fight for higher wages:

Home health aides can’t entirely replicate the fast-food workers’ tactics. Unlike someone flipping burgers, they can’t just walk off the job: That would leave those they care for — the nation’s parents and grandparents — in danger. And crucially, although most low-wage workers battle big corporations, home health-care workers usually are dealing with a different beast: the state, which ultimately pays their wages...

Over at Al Jazeera, David Cay Johnson looks at Walmart's decision to drop 30,000 workers from health care coverage:

Walmart said it must take these actions because it expects health care costs to rise by $330 million above the $170 million increase it budgeted for in 2015. To put those numbers in perspective, $330 million is about a third of the company’s domestic revenue for a single day. Over a year it comes to less than 7 cents out of each $100 Walmart’s underpaid cashiers ring up... A more tax-efficient and paperwork-efficient way to finance the unexpected increased cost of health care for the rank and file would be diverting a dime an hour from the next general pay raise for associates. But that solution assumes Walmart gives its workers regular annual pay increases; it doesn’t. Since its workers have no union, they have no bargaining power. Given the millions still out of work, many of them college graduates, Walmart can easily replace workers who want more money with fresh hires, though hiring and training new workers who make less adds to inefficiency. Walmart is far from alone in not granting general wage increases. So many other big companies let wages stagnate while demanding workers divert more of their wages to health insurance and copays that Walmart’s customers have less to spend, weakening the company’s bottom line.

The Nation's Michelle Chen, meanwhile, discusses the what she calls the new never-ending workday, in an economy that demands "'flexible' labor—rapid-fire changes in schedules, shift-swapping, on-call staff":

Take for example a retail sales worker’s typical day: waiting all morning for the boss to call her about her shift time, learning when she’s due at work an hour before her kid gets off school, a frenzied search for a last-minute babysitter, arriving late and getting demerited by the boss, returning home exhausted only to realize she hasn’t seen her child all day and half the day’s earnings are already spent on the nanny. This constant shuffling between impossible choices grows into a bleak routine—what the researchers call “normal unpredictability,” which is becoming the status quo in many industries. The “pervasiveness of routine disruptions,” Clawson and Gerstel write, wreaks “havoc in people’s jobs and families” in historically unprecedented ways... Though all workers are exposed to scheduling volatility, how a worker copes with the burden of precarious work—a job specifically structured to be unstable—depends on the workplace power structure. Your ability to achieve a decent “work-life balance” may hinge on whether you’re a single parent, how accommodating your boss is about allowing time off for family or school commitments, or whether your workplace is unionized. The poorer you are, the less control you have over these factors on and off the job.

The Business of Debt and Destitution

Using a legal tool known as a "deficiency judgment," lenders can ensure that borrowers are haunted by these zombie-like debts for years, and sometimes decades, to come... Once financial institutions secure a judgment, they can sometimes have years to collect on the claim. In Maryland, for example, they have as long as 36 years to chase people down for the debt. Financial institutions can charge post-judgment interest of an estimated 4.75 percent a year on the remaining balance until the statute of limitation runs out, which can drive people deeper into debt.

In a draconian twist to the subprime lending story, lenders can now remotely shutdown cars when owners miss a payment report Michael Corkery and Jessica Silver-Greenberg:

Roughly 25 percent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year.

But before they can drive off the lot, many subprime borrowers like Ms. Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars’ location and movements.

The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.

Over at TalkPoverty, the Center for American Progress' Rebecca Vallas discusses the trend of practices like the one above and how the United States punishes the poor:

In what seems a reprisal of the predatory practices that led up to the subprime mortgage crisis, low-income individuals are being sold auto loans at twice the actual value of the car, with interest rates as high as 29 percent. They can end up with monthly payments of $500—more than most of the borrowers spend on food in a month, and certainly more than most can realistically afford. Many dealers appear in essence to be setting up low-income borrowers to fail...

Also worth noting is the criminalization of poverty and the high costs that result. In a nationwide trend documented by the National Law Center on Homelessness and Poverty, a growing number of states and cities have laws on the books that may seem neutral—prohibiting activities such as sidewalk-sitting, public urination, and “aggressive panhandling”—but which really target the homeless. (The classic Anatole France quote comes to mind: “The law in its majestic equality forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”)

The Social Society

[W]hile Marc Gunther, editor at large Guardian Sustainable Business, believes that B Lab’s accomplishments over the past seven years are very impressive and deserve praise, he says, “I’m not sure that many Fortune 500 executives are talking about B Corporations.” Gunther touches on a point that many in the B Corp movement have realized: Success for the movement is not necessarily rapid growth in the number of Certified B Corporations. Even if there were 100,000 Certified B Corps, they would represent only a small percentage of the total number of businesses worldwide. A more valuable measurement of success, and perhaps the true legacy of the B Corp movement, would be a dramatic increase in the number of businesses that measure what matters—social and environmental performance, in addition to financial performance—by using credible, whole-business benchmarking tools such as the B Impact Assessment. When businesses measure the effects of their operations on all of their stakeholders, compare themselves with their industry peers, and start to compete to be the best for the world rather than just the best in the world, we will be making progress toward a shared and durable prosperity for all.

[T]o be fully present to the poor, we must first be fully present to ourselves and to our own emotions. The Latin root of “emotion” means “to move out from.” It is from within the emotional space that poverty creates in us that we will ultimately find our way out. By contrast, the Latin root of “addiction” means “to deliver up” or “to yield.” We deliver ourselves up to these addictions precisely to avoid being present:

Our addiction to causes creates separateness rather than connectedness, making poverty part of the system out there rather than part of us in here.

Our addiction to solutions squelches timelessness by placing us mentally in a future that is better than the present.

Our addiction to impact ignores a higher truth by celebrating what we alone have achieved.

When people equate nonprofits with social benefit, they are applying the intention heuristic. That is, they presume that because the intention of the organization is to promote charity, education, health care, or the arts, and because no income is distributed to shareholders, then nonprofits must be good. This is not the case. For-profit firms ultimately are accountable to customers, while nonprofit enterprises are only accountable to donors. As a result, consumers are consistently over-charged and ill-served in sectors that are dominated by nonprofits. The largest nonprofit enterprises in this country are in the education and health care sectors, which account for a large and increasing share of GDP. College tuition and hospital prices are notoriously high, and increases in these prices have far exceeded those in the overall Consumer Price Index... [A]part from religious institutions, I would advocate that nonprofits be subject to the same taxes as for-profit firms. In particular, I believe that exempting hospitals and universities from real estate taxes gives these institutions an unfair advantage in expensive urban areas.

Click herefor more issues of “In Case You Missed It”, our weekly news digest featuring the best thinking on the economy, poverty, inequality and investing, or subscribe to the email.

Discussion

For every student to graduate without debt, the federal government would have to help them pay their tuition one way or another, and that would be costly. That money might be better used to help people who really need it, because most graduates with student loans are basically doing OK. In any case, they're usually better off than the majority of Americans who lack a degree.

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Author

Toni Johnson, Vice President, Knowledge & Influence

Toni Johnson joined Heron in January of 2013 and is tasked with designing and implementing the foundation’s long-term public influence and engagement strategy. She is a former deputy editor and staff writer for the Emmy-winning website of the Council on ...